AN INVENTORY MODEL WITH SEARCH FOR BEST ORDERING PRICE

This paper presents a single-item inventory model with deterministic demand where the buyer is allowed to search for the most favorable price before deciding on the order quantity. In the beginning of each period, a sequential random sample can be taken from a known distribution and there is a fixed cost per search. The decision maker is faced with the task of deciding when to initiate and when to stop the search process, as well as determining the optimal order quantity once the search process is terminated. The objective is to minimize total expected costs while satisfying all demands on time. The paper demonstrates that a set of critical numbers determine the optimal stopping and ordering strategies. Recursive expressions are presented, yielding the critical numbers, as well as the minimal expected cost from the beginning of every period to the end of the horizon.